What are SG&A Expenses?

SG&A Expenses are those expenses that are necessary to keep the business going. However, they are not directly included in manufacturing or product costProduct CostProduct cost refers to all those costs which are incurred by the company in order to create the product of the company or deliver the services to the customers and the same is shown in the financial statement of the company for the period in which they become the part of the cost of the goods that are sold by the company.read more.

SG&A Expense is included in the income statement of the company, and examples include –

  • RentUtilitiesAccounting and legal expensesSales commissionSales CommissionSales commission is a monetary reward awarded by companies to the sales reps who have managed to achieve their sales target. It is an incentive geared towards producing more sales and rewarding the performers while simultaneously recognizing their efforts. A sales commission agreement is signed to agree on the terms and conditions set for eligibility to earn a commission.read more paidSalaries/wages

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List of SG&A

#1 – Selling Expenses

Selling expenses are divided into direct expenseDirect ExpenseDirect cost refers to the cost of operating core business activity—production costs, raw material cost, and wages paid to factory staff. Such costs can be determined by identifying the expenditure on cost objects.read more and indirect expensesIndirect ExpensesIndirect expenses are the general costs incurred for running business operations and management in any enterprise. In simple terms, when you want to buy grocery from a supermarket, the transportation cost to get you to the supermarket and back is the indirect expenses.read more.

  • Direct expenses are shipping expenses of the product and sales commissions.Indirect expenses are the costs that occur throughout the manufacturing process, including product advertising and promotional expenses, traveling expenses, and telephone bills of the sales consultants.

#2 – General & Administrative Expenses

General & Administrative Expenses are the overhead expensesOverhead ExpensesOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more of the company. They are the fixed costs incurred by the company like the rent, mortgages, and insurance that need to be paid. It also includes all the salaries and wages of the workers.

SG&A expense depends on the structure of the company, whether the company has more fixed costs than variable costs and vice versa.

  • Scenario 1: If the company has more fixed costs than variable costs, and if fixed costs are high, it needs to have high annual sales. If even there is a slight dip in revenues, then it won’t be able to cover its fixed costs. Such companies have a high break to generate profits.Scenario 2: If the company has more variable costs and very low fixed costs, it will have more competition. But they survive the phases of fall in revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more as they don’t have to think about covering fixed costs.

Examples of SG&A Expense

Example #1

Now we will see an example of General & Administrative Expenses.

Rajesh is an accountant of a startup companyStartup CompanyA startup can be expressed as a business in its initial phases, searching for a practical and scalable model. Often, these companies launch and market a unique idea, product, or service that in some way offers fresh benefits to the society. Reliable models aid in the rapid growth of the business.read more XYZ. He needs to calculate the Selling General & Administrative expenses, including the depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more.

Rajesh needs to include the salaries of the people of all the company departments and the associated taxes. E.g., utilities, telephone, insurance, rent, repairs & maintenance associated with the building. Also, the office equipment and the advertising expenses, commissions, travel expenses, selling and marketing supplies, and administrative and general supplies.

Once he calculates the SG&A Expenses before depreciation, he deducts the depreciation of the office building and the depreciation of the office equipment. The net $ 238500 is the amount that will be reported on the income statementReported On The Income StatementThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read more.

We will now see some live examples of companies selling General & Administrative expenses. We can get the data from the income statement of the company.

Example #2

SG&A Expenses of ITC are as follows:

We can get the report from the financial tab of ITC limited. We need to choose an income statement to view the SG&A expenses.

Source: Yahoo Finance

We can see that selling, general, and administrative expenses are reported in the operating expenses sectionOperating Expenses SectionOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more of the income statement.

Importance

Selling, General & Administrative expenses are vital in determining your operating income. If we subtract SG&A expenses from Gross Margin, we get Operating Income.

  • It is a key element in determining the company’s profit.These costs are essential in keeping the business going.Sometimes to boost profitability, these costs need to be regularized.During mergers and acquisitionsMergers And AcquisitionsMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion.read more, these costs are a key area. Several repeated positions can be cut down to reduce the SG&A costs and increase the operating income.

Disadvantages

Excessive SG&A Expenses will hurt the company’s profit figures and, in return, reduce the shareholder’s returns.

Important Points to Note

SG&A is an important point to remember when calculating a company’s profitability.

  • It is all the costs that are not related to the direct manufacturing of the product.It is the total of the costs essential for the manufacturing process, like advertising, commissions, travel, etc.Research and development costs are not included in SG&A expenses.

The other important point to note is regarding the situations where there is overspending and how it can be reduced.

Overspending 

  • When such expenses increase too much without a rise in sales or a drop in sales, it is very important to reduce the SG&A costs.High Selling, General & Administrative costs decrease the profitability of the shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read more.

Ways to Reduce SG&A Expenses

  • Restructuring and cost-cutting are required to reduce the expenses of Selling, General & Administrative costs.Reducing non-sales personnel salaries and cutting travel costs will help to regularize these costs.

Conclusion

Selling, General & Administrative expenses are major drivers of operating income. As we know, Gross Margin – SG&A = Operating Income, also referred to as EBIT (Earnings before interest taxes)

Therefore an excessive SG&A expense leads to a decrease in EBIT. But these expenses are also important to carry on a day to day activities. Therefore a balanced amount should be spent keeping in mind the structure of the company (more fixed costsFixed CostsFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more than variable costs and vice versa).

This article has been a guide to what SG&A Expense is and its definition. Here we discuss the list of Selling, General & Administrative Expenses, practical examples, their importance, and disadvantages. You can learn more about Accounting from the following articles-

  • Selling ExpensesExamples of Product CostCalculate Interest ExpenseWhat are Prepaid Expenses?